Feeney v Southstar Homes Pty Ltd

SUPREME COURT OF VICTORIA COURT OF APPEAL
S EAPCI 2023 0102
BRENDON FEENEY	First Applicant
and
NICOLA SOFIA KARAKATSANIS	Second Applicant
v
SOUTHSTAR HOMES PTY LTD (ACN 096 297 022)	Respondent

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JUDGES:	McLEISH, NIALL JJA and OSBORNE AJA
WHERE HELD:	Melbourne
DATE OF HEARING:	16 April 2024
DATE OF JUDGMENT:	28 June 2024
MEDIUM NEUTRAL CITATION:	[2024] VSCA 153
JUDGMENT APPEALED FROM:	[2023] VCC 1420 (Judge Cosgrave)

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CONTRACT – Application for leave to appeal – Construction of settlement deed – Whether outstanding balance of settlement sum payable in event that full amount not credited through work in kind – No obligation to pay outstanding balance in absence of default – Non-payment of balance where no further engagement does not constitute ‘default’ – Whether judge erred in finding implied term requiring payment of balance of settlement sum – No implied term – Whether judge erred in finding subcontractor ‘engaged’ on future project within meaning of deed – Leave to appeal granted – Appeal allowed.

WORDS AND PHRASES – ‘default’ – ‘engage’.

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; Servcorp WA Pty Ltd v Perron Investments Pty Ltd (2016) 50 WAR 226, considered.

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Counsel
Applicants:		Mr D Collins KC with Mr B Petrie
Respondent:		Mr A Dinelli KC with Mr L Freckelton
Solicitors
Applicants:	Rigby Cooke Lawyers
Respondent:	Baker Jones

MCLEISH JA
NIALL JA
OSBORNE AJA:

Introduction

This application for leave to appeal from orders made by a judge of the County Court concerns the construction of a settlement deed entered into in the context of a building dispute between a builder (‘Southstar’, the respondent) and its subcontractor, Form8 Constructions Pty Ltd (‘Form8’) (‘Settlement Deed’). That dispute was resolved on terms which included a payment by Form8 of $345,000 (excluding GST) (‘Settlement Sum’). The critical issue in the case is whether that amount was to be paid by Form8 by way of credit against future subcontracts with Southstar, or whether it was payable even in the absence of such subcontracts.
The judge held that the Settlement Deed included an implied term which, in very rough terms, provided that the whole Settlement Sum was due and payable if there was a failure to provide credit for the full amount of $345,000. The judge held that Form8 was liable to pay the full amount, had failed to do so, and that the applicants, who were the director and construction manager at Form8, were liable under a guarantee contained within the Settlement Deed.
The applicants contend that the judge was wrong to imply the term. By way of a notice of contention, Southstar argues that Form8 was never engaged on a future subcontract and therefore the settlement payment was payable in any event, in instalments which had not been paid, constituting a default and rendering the whole amount immediately due and payable. Alternatively, it contends that Form8 was liable under the contract for the full amount independently of the implied term.
For the reasons that follow, neither ground of the notice of contention can be upheld. Further, the judge was wrong to identify an implied term in the Settlement Deed and the application for leave to appeal must be granted and the appeal upheld.

The facts

The facts are not relevantly in dispute. What follows is largely taken from the agreed summary filed in this Court.
The applicants, who are husband and wife, operated a concreting formwork construction company, Form8. The first applicant, Mr Feeney, was Form8’s construction manager and the second applicant, Ms Karakatsanis, was its director.
The respondent engaged Form8 as a subcontractor on a building project at 182 Johnston Street, Fitzroy by subcontract entered into on or around 31 January 2019 (‘Johnston Street Subcontract’). Form8 carried out works on the project throughout 2019. Form8 and Southstar had not previously worked together on any other projects.
Mr Feeney and Ms Karakatsanis were not parties to the Johnston Street Subcontract.
During the course of the project, a number of disputes arose between the parties. Specifically, Form8 made a progress payment claim against Southstar under the Building and Construction Industry Security of Payments Act 2002 (the ‘Act’), and Southstar alleged that the works carried out by Form8 were incomplete and defective.
Form8 did not admit liability under the Johnston Street Subcontract. Ultimately, the parties entered into a Settlement Deed on 17 January 2020.

Pre-contractual negotiation of the Settlement Deed

Mr Feeney attended a meeting with the director of Southstar, Tino Filippelli, on 19 December 2019, in an effort to resolve the disputes under the Johnston Street Subcontract. The parties did not resolve the matter on that occasion but continued to correspond with each other regarding what they had discussed.
Between their meeting on 19 December 2019 and 17 January 2020 (when the Settlement Deed was entered into), Mr Feeney and Mr Filippelli continued their negotiations exclusively by email.
On 19 December 2019, Mr Feeney emailed Mr Filippelli stating:
I am happy to provide you with a $200,000 credit on future works for you[r] company effectively working the debt off.
On 20 December 2019, Mr Filippelli emailed Mr Feeney referring to his offer made in the meeting on the previous day, which he said was as follows:
1.No further payments against contract.
2.Credit us $500K to be repaid by works in kind, and give yourself the opportunity to make good, restore confidence in your companies [sic] ability to deliver and perhaps regain yourself a customer
In the same email of 20 December 2019, Mr Filippelli then conveyed the following offer:
1. No further payments against contract.
2.Credit us $385K to be repaid by works in kind, and give yourself the opportunity to make good, restore confidence in your companies [sic] ability to deliver and perhaps regain yourself a customer.
On 7 January 2020, Mr Feeney responded by proposing an amount of $295,000 on terms the ‘same as set out below’, being a reference to the terms set out in Mr Filippelli’s email of 20 December 2019. Mr Feeney stated in this context ‘I know we can deliver good work given the opportunity’.
On 16 January 2020, Mr Filippelli responded by email proposing an amount of $340,000, and:
Everything else as per the below.
Please confirm you agree to the above so I can have our solicitor outline some bullet points of how we propose the agreement to be structured.
In the meantime, my team will email you documents for our next project about to commence to price.
Mr Feeney responded the same day, noting:
I’ll agree to $345K if we can do it over a couple jobs 1 job alone may be a bit difficult to cash flow manage.
I am definitely the same mind set as you.
Mr Filippelli agreed at trial that, during these negotiations, the parties did not discuss any cash payment being made by Form8 to Southstar.

The Settlement Deed

The Settlement Deed was drafted by Southstar’s lawyer. It was in the form of a letter of offer from Southstar to Form8, which commenced by referring to Form8’s ‘last offer to us [Southstar] dated 7 January 2020’. Mr Filippelli acknowledged at trial that this should have been a reference to Mr Feeney’s email of 16 January 2020.
The terms of the deed are contained in 15 dot points. For ease of reference, in these reasons each dot point is replaced by number from 1 to 15 and described as a clause.
Parts of the Settlement Deed are concerned with the completion and rectification of works, and payment therefor, relating to the Johnston Street Project over which the parties had been in dispute. Other parts deal with an additional payment by Form8.
As to the first general aspect, the Settlement Deed provided that:
(a)Form8 would complete identified incomplete works on the Site by no later than 24 January 2020 (cl 1);
(b)Form8 would complete remaining identified defective works by no later than 31 January 2020 (cl 2); and
(c)the completion of incomplete works and defective works would be at no cost to Southstar and Form8 would waive any rights or entitlement to be paid in respect of this work (cl 3). Clause 3 further provided:
for the avoidance of any doubt, of the total adjusted Subcontract amount of $2,379,000.00 exl. GST we have paid you $2,202,991.21 exl. GST, with a balance of $176,008.79 exl. GST payable under the Subcontract (‘Subcontract Balance’). You agree that you are not entitled to payment of the Subcontract Balance and forever waive and forgo your rights and entitlements to the Subcontract Balance.
The parties agreed that, in the event of any dispute as to completion of the incomplete works or defective works, an independent third party would be mutually appointed to determine the dispute and the parties agreed that the decision of the independent third party would be binding and final (cl 4).
Form8 agreed that it would not issue a payment claim under the Johnston Street Subcontract pursuant to the Act (cl 5).
Clauses 6, 7 and 8 dealt with a payment from Form8 to Southstar. Those clauses, which are central to the current dispute, are relevantly in the following terms (again with dot points replaced by numbers):
6.You [Form8] agree to pay us [Southstar] $345,000 exl. GST (‘Settlement Sum’) by way of credit in our favour, by us applying the Settlement Sum against the subcontract sum of any future projects (maximum 2 x projects unless mutually agreed otherwise) we may engage you as a subcontractor to complete for us.
7.You must credit us the Settlement Sum by no later than 12 months from the date you accept this offer, however, if we do not engage you as a subcontractor on any future project within 6 months from the date you accept this offer, you agree that you must pay us the Settlement Sum by way of instalments into our nominated bank account, as follows:
(a)10 x equal consecutive monthly payments of $34,500 excl. GST commencing 8 months from the date you accept this offer;
8.You agree that in the event you default in crediting or paying the Settlement Sum in accordance with the payment terms above, the entire amount of the Settlement Sum less any amounts already paid by you or credited to us, will become immediately due and owing to us (‘Default Amount’). …
Clause 9 relevantly provided for mutual releases:
9.The parties mutually release each other from all matters related to the Subcontract, the works and the head contract between us [Southstar] and the principal for the project. However, although your [Form8’s] release of us will be immediately [sic] upon you accepting this offer, our release of you will not take effect until the Settlement Sum is paid/credited to us in full. …
Clauses 10 and 11 provided for confidentiality and non-disparagement respectively.
Clause 12 provided for a guarantee by the applicants in the following terms:
12.To secure our [Southstar’s] rights and interests under these settlement terms, Mr Brendon Feeney and Mrs Nicola Sofia Karakatsanis agree to jointly and severally guarantying [sic] the obligations of Form8 Constructions Pty Ltd under these settlement terms with immediate effect upon signing these settlement terms.
Clause 13 provided that, although the Settlement Deed was intended to be immediately binding, the parties agreed to record the agreed terms in the form of a settlement deed. In the event, no further version of the deed was prepared and the applicants seek to characterise cl 13 as a drafting error given that the Settlement Deed was itself a deed prepared by Southstar’s lawyer and signed by the parties. In any event, there is no dispute that the Settlement Deed constituted a contract.
Clause 14 allowed for the Settlement Deed to be executed by the parties at different times with an undertaking that it would be executed in the presence of a witness and, finally, cl 15 stated that the document was executed as a deed.

The Walpole Street Project

As foreshadowed in Mr Filippelli’s email of 16 January 2020, immediately following the execution of the Settlement Deed, Southstar and Form8 commenced negotiations with respect to the potential entry into a subcontract agreement by which Southstar would engage Form8 to perform subcontract works at a new project at 64–68 Walpole Street, Kew (‘Walpole Street Project’).
In the course of those negotiations, Southstar and Form8 agreed upon the scope of work to be performed by Form8, the subcontract sum to be paid by Southstar (being $893,769), and the amount of the credit (being $120,024) to be applied against the Settlement Sum.
A proposed subcontract for the Walpole Street Project was exchanged between the parties but ultimately not agreed to. In that respect, on 12 March 2020, an employee of Southstar emailed Mr Feeney a link to a proposed subcontract for the Walpole Street Project and asked ‘[c]an you please sign and return by COB Monday 16.03.2020’. The proposed subcontract was not executed by Form8.
On 19 March 2020, Form8 provided a revised draft of the proposed subcontract with various handwritten amendments. These were not accepted. As will appear in more detail, the judge found that, while Southstar and Form8 never signed a written subcontract for the work to be performed on the Walpole Street Project, Southstar had nevertheless engaged Form8 on the project for the purpose of the Settlement Deed.[1] This finding is the subject of Southstar’s notice of contention.
[1]Southstar Homes Pty Ltd v Form8 Constructions Pty Ltd & Ors [2023] VCC 1420, [122]–[123], [128]–[129] (Judge Cosgrave) (‘Reasons’).
On 7 April 2020, Southstar appointed voluntary administrators. The report of the administrators dated 12 May 2020 states that, as at their appointment, Southstar terminated all its projects and its trading operations. Form8 was informed by Southstar’s site manager of the appointment of administrators and told not to attend the site the next day for work on the Walpole Street Project. Form8 did not perform further work on the Walpole Street Project and was not engaged by Southstar on another project.

The pleadings

Southstar commenced proceedings in the County Court seeking the payment of $374,500 ($345,000 plus GST, but reduced by the amount of $5,000) from the applicants pursuant to the guarantee. In its original statement of claim, Southstar alleged a breach by Form8 of two express terms of the Settlement Deed by failing to pay or credit the sum of $374,500 to it.[2] The express terms of the Settlement Deed relied on were cls 7 and 8.
[2]Amended statement of claim dated 11 July 2023, [17]–[18].
Southstar alleged that it had not engaged Form8 as a subcontractor to complete works on any project and therefore the full amount of $345,000 (excluding GST) was owing. It did, however, acknowledge that between 10 March 2020 and 2 April 2020, Form8 had partially completed drawings in relation to the Walpole Street Project, pleading as a particular that:
[Form8] partially completed the PT component of the drawings and did not complete the stairs component and as a consequence, Southstar estimates that [Form8] did $5,000 worth of work, which should be deducted from the Settlement Sum.[3]
[3]Ibid [11].
By way of amendment to the statement of claim, Southstar alleged that the Settlement Deed contained an implied term to the following effect:
The Deed of Settlement contained an implied term that if Southstar engaged the First Defendant on any project(s) within 6 months of entry into the Deed of Settlement for which it is agreed that the First Defendant will credit Southstar only a portion of the total amount of the Settlement Sum:
(a) the First Defendant must credit Southstar the agreed amount within 12 months of entry into the Settlement Deed in accordance with the clause pleaded in paragraph 6(b) above; and
(b) the balance of the Settlement Sum is payable in monthly instalments in accordance with the clause pleaded in paragraph 6(b) above (with no further monthly payments required after the balance of the Settlement Sum less the amount of the agreed credit has been discharged in full) (Implied Term).
PARTICULARS
Term implied in fact in order to give business efficacy to the Deed of Settlement.[4]
[4]Ibid [6A].

The reasons for decision

The judge ultimately concluded that, under the Settlement Deed, Form8 was required to pay in full the Settlement Sum, either in cash or in kind or a combination of the two; that it had failed to credit any amount in favour of Southstar; and that the full amount of $345,000 was therefore owing, reduced by the amount of $5,000 (as conceded by Southstar).[5] He made an order requiring the guarantors to pay the amount of $340,000 to Southstar. That amount did not include $34,500 which Southstar had claimed in respect of GST, which is no longer in issue.
[5]Reasons, [67], [234].
The judge structured his reasons for judgment by reference to eight issues that the parties had agreed should be determined by the Court.[6] For present purposes, the critical issues are:
(a)what is the proper construction of the Settlement Deed (Issue 1);
(b)does the Settlement Deed contain the implied term alleged by Southstar (Issue 2);
(c)did Southstar enter into a subcontract with Form8 with respect to the Walpole Street Project or, alternatively, engage Form8 as a subcontractor on that project for the purposes of the Settlement Deed (Issue 3);
(d)did Form8 breach the Settlement Deed — that is, did Form8 default in crediting or paying the Settlement Sum as required by the deed (Issue 5); and
(e)are the applicants liable under the guarantee? (Issue 8)

Issue 1: The construction of the Settlement Deed

[6]Ibid [16].

After setting out the relevant principles that apply to the construction of a commercial contract which were not in dispute between the parties[7] and the relevant clauses of the Settlement Deed,[8] the judge set out under the heading ‘General statement of parties’ positions’ the competing constructions, ultimately concluding that the construction advanced by Southstar ought be accepted.[9]
[7]Ibid [17]–[20].
[8]Ibid [21]–[25].
[9]Ibid [26]–[31], [70].
In his description of the relevant clauses, the judge described cl 6 as the ‘Credit Obligation Clause’ and cl 7 as the ‘Mechanical Clause’.[10]
[10]Ibid [23].
The judge said:
The Deed speaks of the concepts of engagement (which Southstar was to do, if at all, within six months) and the application of the credit (which was to occur within 12 months). I agree with Southstar’s reading of the Deed whereby it contends that:
• Southstar’s engagement of Form8 does not constitute the giving of credit against the Settlement Sum;
• the giving of credit against the Settlement Sum cannot precede the engagement.
Hence, where the credit is given by works in kind, the credit could not take effect when the parties agreed upon the amount of the credit to be applied to a particular job. It could take effect only when Form8 actually performed works to the value of the credit agreed on that job. This means that for Southstar to get the full benefit of the credit, Form8 needs to complete the work agreed or at least complete enough of the work so that the value of the work equals or exceeds the value of the agreed credit on that job.[11]
[11]Ibid [27]–[28].
The judge set out, but rejected, the construction of the Settlement Deed advanced by Form8, the critical elements of which provided that Form8 would ‘pay’ a Settlement Sum of $345,000 by way of credit which was to be applied by Southstar; Form8’s obligation to credit Southstar was limited to a period of 12 months; and there were only two circumstances in which Form8 would be required to make a cash payment:
(a)in the event that Southstar did not engage Form8 on a project within 6 months; or
(b)if Form8 ‘defaulted’ in either crediting or paying the Settlement Sum, meaning a failure to perform an obligation when the time for performance fell due.[12]
[12]Ibid [29].

The judge rejected Form8’s construction because he considered that it gave Southstar ‘no real practical benefit’ from the Settlement Deed.[13] He said that in the events that happened, because Southstar entered administration and work on the Walpole Street Project stopped, Form8 was not required to provide services and performed no work on site and conferred no credit benefit upon Southstar. The judge observed that on Form8’s construction:
[…] although the Deed stated that Form8 should credit Southstar with an amount of $345,000 (excluding GST), the defendants submitted that properly construed, the Deed permitted them on the present facts to avoid providing Southstar with any benefit from the credit.[14]
[13]Ibid [31].
[14]Ibid.
The judge returned to the construction of the Settlement Deed a short time later in his reasons when he said:
Overall, I prefer the approach for which Southstar contends. It is consistent with the Deed and the admissible history that Southstar and Form8 agreed to a commercial arrangement whereby:
• the parties resolved their differences over the Johnston Street project without going to trial;
• notwithstanding the claim or entitlements which Form8 had, or may have had, in relation to the Johnston Street project, Form8 agreed to compensate Southstar for the loss and damage alleged regarding that project;
• the compensation was $345,000 and was payable by work in kind or in cash or a combination of the two;
• it was only when Southstar received the full benefit of the credit that the release of Form8 became operative and effective. Until then, Form8 remained exposed.[15]
[15]Ibid [67].
The judge identified the ‘underlying purpose’ of the Settlement Deed as being to resolve the dispute between the parties stemming from the Johnston Street Project ‘quickly, cheaply and without resort to litigation’.[16] He said that the deed did this ‘by providing Form8 a path by which to restore the Johnston Street [P]roject and an option to satisfy the outstanding debt by way of cash payment or work in kind’.[17]
[16]Ibid [70].
[17]Ibid.
As already observed, the judge held that Form8, and the guarantors, were liable to pay the Settlement Sum to Southstar. An area of present dispute between the parties concerns whether the judge held that the Settlement Deed, on its proper construction and without the need for an implied term, required Form8 to pay the Settlement Sum in full by requiring both a payment by way of credit and a monetary payment to ensure that Southstar got the ‘full benefit’ of the Settlement Deed or whether this outcome could only arise in the event that the implied term formed part of the Settlement Deed. In other words, it is in dispute whether the order made by the judge was based on the terms of the Settlement Deed independently of the implied term or whether it was based solely on a breach of the implied term.
Certainly, the judge said that he preferred Southstar’s submissions, and specifically referred to Southstar’s submission that the parties had agreed to a ‘commercial arrangement’ and that ‘the compensation was $345,000 and was payable by work in kind or in cash or a combination of the two’ and that Form8 was ‘to satisfy the outstanding debt by way of cash payment or work in kind’.[18]
[18]Ibid [67], [70].
However, if the Settlement Deed so provided, it is difficult to see how the judge could have concluded that the implied term was necessary; that the deed was unworkable having regard to its express terms; or that it would provide no practical benefit to Southstar in the events that happened.[19] Further, when the judge came to deal with the question of breach, he did so solely by reference to the implied term.[20] Although there is perhaps room for debate, the reasons can best be reconciled by concluding that the judge based his orders solely on a breach of the implied term. His earlier apparent acceptance of Southstar’s construction can be understood as going no further than identifying the commercial purpose of the deed. It was for that reason that the judge went on to consider the implication of the additional term.
[19]Ibid [86], [93].
[20]Ibid [150]–[154].
As will appear, regardless of whether the issue arises under proposed Ground 1 of the appeal or Ground 2 of the notice of contention, it will be necessary for this Court to come to its own conclusion on the correct construction of the Settlement Deed as part of its analysis of whether the implied term was part of the deed.

Issue 2: The implied term

The judge commenced his analysis of the implied term arguments by reiterating that the purpose of the Settlement Deed was to resolve the dispute between Form8 and Southstar regarding the Johnston Street Project.[21] He identified the deed as a practical mechanism to resolve the dispute.[22] The judge noted that the Settlement Deed did not expressly address the scenario, which had in fact arisen, where Southstar had engaged Form8 on a project which would have allowed a partial credit but, because Southstar was placed in administration, there was no other project against which Form8 could work off the balance of the credit in Southstar’s favour.[23]
[21]Ibid [71].
[22]Ibid.
[23]Ibid [72].
In deciding whether to accept the existence of the implied term, the judge applied the principles identified by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.[24]
[24](1977) 180 CLR 266, 283 (Lord Simon of Glaisdale, Viscount Dilhorne and Lord Keith of Kinkel) (‘BP Refinery’).
The judge recognised that the Court should be slow to imply a term and that the onus lies upon the party alleging the implied term to establish that it ought be implied.[25] Having said that, the judge said that the Settlement Deed was not especially well drafted or comprehensive, noting that it provided that the terms were to be further refined and recorded in a formal settlement deed.[26] In those circumstances, the judge considered that the Court should not be overly reticent to identify an implied term.[27] The judge concluded that, on balance, the better view was that the deed contained the implied term alleged by Southstar.[28]
[25]Reasons, [80], citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 346 (Mason J); [1982] HCA 24 (‘Codelfa’).
[26]Reasons, [82].
[27]Ibid [83].
[28]Ibid [84].
In doing so, the judge said that he accepted Southstar’s submissions, which he found more persuasive.[29] Specifically:
(a)on the question of business efficacy, the judge said that the Settlement Deed ‘would not be workable if Southstar could not obtain the full benefit of the credit and Form8 could not obtain a release. If neither outcome were achievable, there would be little or no commercial utility in the Deed’;[30]
(b)on whether the proposed term was obvious, the judge referred to a debate on whether obviousness should be decided from the perspective of the reasonable or officious bystander;[31]
(c)he rejected Form8’s submission that the principal or sole object of the Settlement Deed was to provide Form8 with an opportunity to satisfy the credit by work in kind.[32] On the contrary, the deed expressly contemplated a scenario in which Form8 would make monthly cash payments to discharge the agreed credit even though it was not in default.[33]
[29]Ibid [85].
[30]Ibid [86].
[31]Ibid [87].
[32]Ibid [88].
[33]Ibid [89].
Importantly to his reasoning, the judge rejected Form8’s submissions that, because the Settlement Deed only provided two circumstances in which Form8 was to make a cash payment, the proposed term was inconsistent with the express terms of the deed.[34]
[34]Ibid [92].
The judge said that, if there was no implied term, Southstar would not receive any practical benefit from the credit and Form8 would not obtain a release.[35] He considered there to be no sound commercial reason why Form8 should receive a windfall outcome where it did not perform the works on the Walpole Street Project but would still get the benefit of $120,024 for the partial credit and have no ongoing obligation to Southstar for the balance of the Settlement Sum of $345,000. He said:
I consider it extremely unlikely that Southstar and Form8 would have agreed upon any scenario which enabled Form8 to be released without Southstar obtaining the full benefit of the credit. The factual context and terms of the Deed indicate that, in order to release Form8, Southstar wants to receive the actual benefit of the credit, not just a commitment by Form8 to provide the credit in the future. In my view, this outcome is supported by, and consistent with, the terms of the Deed which made Southstar’s release of Form8 dependent on this very fact.[36]
[35]Ibid [93].
[36]Ibid.
In the result, the judge concluded that the Settlement Deed contained the implied term contended for by Southstar, which was in the following terms:
If Southstar engaged the First Defendant on any project(s) within 6 months of entry into the Deed of Settlement for which it is agreed that the First Defendant will credit Southstar only a portion of the total amount of the Settlement Sum:
(a) the First Defendant must credit Southstar the agreed amount within 12 months of entry into the Settlement Deed in accordance with the settlement sum provisions; and
(b) the balance of the Settlement Sum is payable in monthly instalments in accordance with the clause pleaded in the settlement sum provisions (with no further monthly payments required after the balance of the Settlement Sum less the amount of the agreed credit has been discharged in full).[37]

Issue 3: Did Form8 enter into a subcontract for the Walpole Street Project or, alternatively, was it engaged on that project?

[37]Ibid [73].

The judge concluded that the parties did not enter into a subcontract with respect to the Walpole Street Project.[38] Alternatively, if there was a contract, it was abandoned.[39] There is no cross-appeal from those findings.
[38]Ibid [129].
[39]Ibid [143].
The judge concluded, however, that Form8 was engaged on the project.[40] He reached that conclusion based on the findings of fact that he made, including that by 3 March 2020, after negotiations, Southstar and Form8 agreed upon the cost of the scope of works of the project and the credit to be applied from the Settlement Sum. Further, Form8 had sent copies of documentation to Southstar and, by 19 March 2020, Form8 was told to proceed with the architectural drawings and Form8 had ordered and paid for steel products from the Australian Reinforcing Company for the purposes of the project.[41]
[40]Ibid [128].
[41]Ibid [122].
The judge concluded that, for the purposes of the Settlement Deed, it was not necessary for there to be a formal contract in order for Form8 to be engaged in relation to a project. He noted the ordinary definition of ‘engage’, which included to ‘keep occupied or busy, provide occupation for; hire for work, take on as an employee’.[42] The judge noted that Southstar was keen to involve Form8 in the project, noting that Southstar asked for Form8 to undertake work that went beyond merely assisting Southstar to generate information.[43]

Issue 5: Did Form8 breach the Settlement Deed?

[42]Ibid [124], citing the New Shorter Oxford English Dictionary (Clarendon Press, 4^th ed, 1993).

[43]Ibid [126]–[127].

The judge recorded that Southstar claimed that there was an event of default and that Southstar was entitled to the full amount of the Settlement Sum which had not been paid. The judge distilled the arguments of Southstar as follows:
(a)if Southstar did not engage Form8 in relation to the Walpole Street Project, then Form8 was obliged to pay the Settlement Sum in monthly instalments but paid no such instalments;
(b)if Southstar did engage Form8 in relation to Walpole Street Project, Form8:
(i)did not credit the Settlement Sum within 12 months because the works on the Walpole Street Project were not finished within that time; and
(ii)failed to comply with the implied term by failing to make any monthly payments of the Settlement Sum.[44]
[44]Ibid [147].
Having thus identified the claim, the judge concluded that ‘an obligation to make cash payments under the implied term arose and that Form8 subsequently failed to perform this obligation’.[45]
[45]Ibid [150].
Although the judge found that Southstar had engaged Form8 on the Walpole Street Project, he found that Form8 had not credited any amount in respect of that project. He reached that conclusion because he held that it was not possible to credit an amount under the Settlement Deed until the relevant work had been undertaken. That is, there could be no credit in respect of future work on an existing project. Under Issue 4, the judge said:
Southstar and Form8 agreed that the Settlement Sum in the Deed was to reduce by $120,024 by reason of Southstar’s engaging Form8 to perform concreting work at the Walpole Street Project. In saying this, I find that the agreed credit reduction did not occur by reason simply of the fact of the engagement. In other words, Form8’s liability in relation to the Settlement Sum did not reduce by $120,024 merely as a result of Southstar engaging Form8 to provide concreting services for the Walpole Street Project. The credit was applied or took effect when Form8 successfully completed its agreed scope of works or at least such part of the works as reflected a cost to Southstar of the value of the credit. It was only at this time that Southstar had the benefit of work which was valued at $120,024 more than Southstar paid for it.[46]
[46]Ibid [145].
The judge concluded that, taking Form8’s case at its highest, and allowing a credit of $120,024 in favour of Form8, there remained a debt of $224,976 and, after eight months from the date of entry into the Settlement Deed, Form8 had an obligation to begin paying the remainder of the balance in monthly instalments until the debt was satisfied.[47]
[47]Ibid [151].
The judge found that Form8 was in default of its obligation to make such payment and the default clause was therefore enlivened.[48] He further held that, once the default clause was enlivened, the entire amount of the Settlement Sum (less any amounts already paid or credited) became immediately due and owing.
[48]Ibid [152].
It is useful to set out in full the following part of the judgment dealing with the breach of the implied term:
For the reasons that follow, I find that an obligation to make cash payments under the implied term arose and that Form8 subsequently failed to perform this obligation.
Taking the defendants’ case at its highest, and assuming that the full $120,024 of the Walpole Street project credit was applied to the Settlement Sum, there nevertheless remained a debt in the amount of $224,976. This debt remained on foot eight months after Form8 entered the Deed (being 17 September 2020). At this point, Form8 had an obligation to begin paying the remainder of the balance in monthly instalments until the debt was satisfied.
It is agreed that Form8 did not make any monthly payments. Therefore, Form8 was in default of its obligation to make such payments and the Default Clause was enlivened. Once the Default Clause was enlivened, the entire amount of the Settlement Sum (less any amounts already paid by Form8 or credited to Southstar) became immediately due and owing.
The reality is that no credit was applied towards the Settlement Sum from the Walpole Street project. Therefore, the full $345,000 was owing when the eight month period ceased. At this time, the Settlement Sum became payable in 10 monthly instalments. Form8 made no such payments. As Form8 did not comply with this obligation, it was in default and the whole of the Settlement Sum became immediately due and payable by operation of the Default Clause.
This debt has not subsequently been satisfied in any way. I find that this amounts to a default in paying or crediting the Settlement Sum.[49]
[49]Ibid [150]–[154].
The judge’s reference to an obligation to pay the remainder of the balance in monthly instalments could only have arisen under the implied term. As appears from the terms of cl 7, the obligation to pay monthly instalments only arose under the express terms if there had been no engagement.

Issue 8: Liability under the guarantee

The judge concluded, under Issue 8, that Form8 was liable to Southstar under the Settlement Deed. Because no credit was applied in relation to the Walpole Street Project, the full amount of $345,000 was owed to Southstar, although Southstar conceded in its statement of claim that the amount claimed should be reduced by $5,000. Because Form8 had gone into administration and Southstar could not enforce its claim against it, the applicants were liable as guarantors of Form8’s obligations under the Settlement Deed.[50]
[50]Ibid [234].

Proposed grounds of appeal

Although the application for leave to appeal contained four proposed grounds, shortly before the hearing the Court was advised that Grounds 3 and 4 were abandoned. Grounds 1 and 2 are in the following form:
1. The primary judge erred in:
(a)concluding that the [Settlement Deed] conferred a discretion on the respondent to elect to be paid the settlement sum in cash;
(b)failing to conclude that [Form8] was not required to pay the settlement sum in cash, except in the confined circumstances provided for in the Settlement Deed, neither of which applied;
(c)failing to conclude that Form8’s ‘failure’ to credit the settlement sum was not because of any breach by Form8, but because the respondent ceased its trading operations, and entered external administration, bringing the Walpole Street project to an end and resulting in Form8 not being engaged on another project; and
(d)failing to conclude, in the absence of a breach by Form8 of its obligations, that the guarantee given by the applicants was not engaged.
2.The primary judge erred in concluding that the Settlement Deed contained the implied term alleged by the respondent.

Notice of contention

As originally formulated, there was a single ground contained within the notice of contention asserting that the judge erred by:
(a)failing to hold that the term ‘engage’ in the Settlement Deed required entry into a binding subcontract agreement; and
(b)on that basis, holding that Southstar had engaged Form8 with respect to the Walpole Street Project.
During the hearing of the application, in circumstances that require some explanation, Southstar sought to amend its notice of contention by adding Ground 2 in the following terms:
The trial judge erred by:
(a)failing to hold that there was a default under the express terms of the Settlement Deed by reason of Form8’s failure to credit Southstar the full amount of the Settlement Sum within the 12-month period provided in the Mechanical Clause [(cl 7)]; and
(b)on this basis, failing to hold that alternative default entitled Southstar to payment of the Settlement Sum as a debt from Form8, and the applicants, under the Default Clause [(cl 8)] on and from 17 January 2021.

The course of argument in this Court

At the commencement of his oral submissions, senior counsel for the applicants said that only two issues arose for determination in this Court. The first was whether the judge was correct to recognise the implied term that he did.[51] The second was whether the judge was correct in holding that Southstar had engaged Form8 on the Walpole Street Project, the second point having been raised by the notice of contention.
[51]Proposed Ground 2 on the application for leave to appeal.

In so formulating the issues, senior counsel implied that Ground 1 of the application for leave to appeal, which concerns the construction of the Settlement Deed, was not pressed. No doubt the focus on the implied term was explicable if the judge had solely determined the breach of contract which founded the order for payment on a breach of the implied term. On that basis, if there was no implied term, it would follow that there could have been no breach and the order for damages or the payment of money would fall. Proposed Ground 1 of the appeal was left in a somewhat uncertain state, in that the applicants accepted that their arguments on Ground 1 were relevant to the context in which the implied term arguments had to be considered.
Faced with this dilemma, Southstar argued that the judge had also found a breach, and a liability to pay, under the express terms of the Settlement Deed. Against the possibility that this Court would hold that the basis of the primary judgment was confined to a breach of the implied term, and perhaps fearing that the implied term would not be sustained in this Court, Southstar applied for leave to amend its notice of contention to advance the argument that, independently of the implied term, Form8 was liable to pay the Settlement Sum in full. The application for leave to amend the notice of contention was opposed.
As already anticipated, this rather untidy state of affairs is less troublesome once it is appreciated, as it must be, that before one reaches any question of an implied term it is necessary to identify and construe the express terms of the contract.[52] For that reason, it will be necessary to consider whether the judge correctly construed the contract; whether Southstar can sustain the judgment on the terms of the Settlement Deed without recourse to any implied term; and whether, on its proper construction, there was any scope for an implied term of the kind pleaded and found by the judge. That exercise of construction will necessarily involve considering the submissions made by the applicants under their proposed Ground 1 and the submissions of Southstar under its proposed Ground 2 of the notice of contention. We can discern no prejudice in allowing argument on the proposed amended notice of contention.
[52]Servcorp WA Pty Ltd v Perron Investments Pty Ltd (2016) 50 WAR 226, 244 [89] (Buss JA, Martin CJ and Murphy JA agreeing); [2016] WASCA 79 (‘Servcorp’), citing MSAS Cargo International Pty Ltd v Agfa-Gevaert Ltd [2000] VSCA 197, [17] (Brooking JA, Charles and Batt JJA agreeing).
In these circumstances, it is in the interests of justice to treat the arguments on Ground 1 of the application for leave to appeal as relevant to the construction of the Settlement Deed and to give leave to Southstar to amend its notice of contention to add proposed Ground 2.

The applicants’ submissions

Construction of the Settlement Deed

The applicants submit that, at the time the Settlement Deed was made, there was an unresolved dispute between Southstar and Form8 in relation to the Johnston Street Project. Southstar contended that the work performed by Form8 was incomplete and defective in certain respects. Form8 denied this and said that it was owed money for work done. Neither party admitted wrongdoing.
In order to resolve that dispute, the parties entered into negotiations, which were resolved by the Settlement Deed. In looking at the mutual benefits and obligations under the Settlement Deed, the applicants say that it is wrong to confine the analysis to the Settlement Sum. Clauses 1 to 3 dealt with the dispute about incomplete or defective work and Form8 agreed to undertake further work, without any claim to further payment and by forgoing the shortfall in the contract sum.
Turning to the Settlement Sum, the applicants submit that Form8 was required to pay Southstar the Settlement Sum ‘by way of credit’, which was to be applied by Southstar (not Form8) against the subcontract sum of any future projects on which Southstar may engage Form8. Contrary to the finding of the judge, the applicants submit that the Settlement Deed did not require that any credit extended by Form8 be applied by Southstar in respect of completed work. So, for example, the Settlement Deed permitted the crediting of an amount payable under a subcontract in advance of the work being completed.
The applicants submit that the Settlement Deed provided for only two circumstances in which Form8 would be required to make a cash payment:
(a)if Southstar did not engage Form8 on any future project within six months after entering into the Settlement Deed, Form8 was required to pay the Settlement Sum in instalments over 12 months; or
(b)if Form8 ‘defaulted’ in crediting or paying the Settlement Sum, in which case the entire balance of the Settlement Sum would be immediately due and payable.
The applicants submit that, as found by the judge, Form8 was engaged on one project, namely the Walpole Street Project, and credited an amount in respect of that project. Once Form8 was engaged on ‘any’ project within the six-month period, the Settlement Sum was to be credited and applied. It was only if there was a default that Form8 would come under an obligation to pay the Settlement Sum, less any amount that had been paid or credited.
The applicants submit that the word ‘default’ means a failure to perform an obligation when the time for performance fell due and that Form8 was not in any breach of the Settlement Deed, so that the guarantee given by the applicants was not engaged.

Implied term

The applicants submit that the judge was wrong to find an implied term in the contract. They submit that, in order for a term to be implied into a contract, the five criteria in BP Refinery, which are cumulative, must be satisfied. The argument proceeded by reference to the decision of the Court of Appeal of the Supreme Court of Western Australia in Servcorp.[53]
[53](2016) 50 WAR 226; [2016] WASCA 79.
The implied term was not necessary in order to give business efficacy to the agreement because, for the reasons the applicants advanced under Ground 1, the Settlement Deed was commercially effective.
Second, the alleged term was not obvious: it covered the same subject matter as the express terms and introduced a level of complication that was far from obvious.
Third, the implied term was inconsistent with the intention of the parties as evidenced by the express terms, which confined the circumstances in which Form8 would be required to make a cash payment.
The applicants submit that the Settlement Deed provided for the crediting and application of amounts against subcontract sums but plainly contemplated that the amounts credited may be less than the full Settlement Sum. In that circumstance, Form8 would not be in default of the agreement but equally would not obtain the benefit of the release until the amount was paid or credited in full. Contrary to the finding of the judge, this did not result in any windfall to Form8 because it would still be liable to any claims in respect of the Johnston Street Project.

Was Form8 ‘engaged’?

The applicants accept that there was no formal contract between Form8 and Southstar with respect to the Walpole Street Project. Nevertheless, they submit that Form8 was engaged on that project and refer to correspondence seeking to establish the work that was asked for and performed. That work entitled Form8 to payment, potentially by the application of restitutionary principles.

Southstar’s submissions

Construction of the Settlement Deed

Southstar submits that, by the Settlement Deed, the parties sought to achieve a commercial resolution of a substantial pre-existing dispute concerning the Johnston Street Project. By that settlement, Form8 agreed to provide a settlement sum of $345,000 and, on the applicants’ construction, Form8 could entirely avoid the obligation to pay this liquidated sum. It says that, on the express terms of the contract, there was a liability to account for the full payment of the Settlement Sum and that is what the judge found. It submits, therefore, that the judgment in its favour was based on the express terms of the contract but that the judge went on to consider and accept an alternative case based on the implied term.
Southstar’s primary submission is that it does not need the implied term. Using the judge’s descriptions of the clauses, Southstar submits that it is necessary to read the credit obligation clause (cl 6), the mechanical clause (cl 7) and the default clause (cl 8) together, so that:
(a)in the event that Form8 was engaged on any project within six months of entering the deed, there was a correlative obligation on Form8 to credit the Settlement Sum within 12 months;
(b)In the event there was no engagement within the six-month period, Form8 was required to pay the Settlement Sum in 10 monthly instalments commencing eight months after the signing of the Settlement Deed; and
(c)in the event that, by either path, Form8 does not credit the full amount, the default clause is engaged, which entitles Southstar to recover the outstanding balance of the Settlement Sum immediately.
Southstar says that the judge accepted this construction at paragraph 48 of his reasons.
Finally, Southstar contends that the applicants attribute impermissible significance to the content of pre-contractual negotiations in construing the Settlement Deed.

Implied term

In the event that the Court rejects Southstar’s construction of the express terms of the Settlement Deed, Southstar submits that the judge was correct to identify the implied term, responding to each of the bases on which the applicants say the judge erred in this respect.
First, it says that the implied term is consistent with the express terms of the Settlement Deed because neither cl 6 nor cl 7 contemplates a scenario where Southstar engages Form8 on only one project for which the credit is less than the full Settlement Sum, and the implied term fills that gap. Further, the implied term is consistent with the express contemplation in the release that Southstar would obtain the full benefit of the Settlement Sum by payment, credit or a combination of the two, and in the default clause that there could be a scenario where there was a partial credit and a payment of the balance.
Second, it says that the implied term is necessary to give the Settlement Deed business efficacy because, as the judge found, there would be little or no commercial utility in the deed if Southstar did not obtain the full benefit of the Settlement Sum and Form8 did not obtain the benefit of the release.
Third, it contends that the unsophisticated nature of the Settlement Deed attenuates the obviousness criterion. The criterion is satisfied because there is a gap in the express terms, the implied term enables each party to realise the benefits for which they contracted, the release and default clauses already admit of the possibility of payment of the Settlement Sum by a combination of credit and payment, and the implied term is the only mechanism that could respond to that gap in a manner consistent with the terms and purpose of the instrument.

Was Form8 ‘engaged’?

Southstar submits that, for the purposes of cl 6 of the Settlement Deed, Southstar will only ‘engage [Form8] as a subcontractor’ if there is a binding subcontract. It is not enough that there is an informal engagement short of a contract, or the performance of work, even if that work would support a claim in quantum meruit. In this latter respect, it notes that a quantum meruit claim can only arise where there is no contractual remedy available.[54] Southstar contends that this construction follows from various features of the text and context of the Settlement Deed:
(a)The word ‘engage’ is used in the composite phrase ‘engage you as a subcontractor’ and such engagement requires entry into a binding subcontract agreement.
(b)The fact that the mechanical clause (cl 7) contains a collateral obligation for payment that operates if there is no engagement means that the fact and timing of an engagement requires precise identification, as is achieved through a formal contract. This construction is also consistent with the deed’s purpose of settling the dispute quickly, cheaply and without resort to litigation because it provides a certain yardstick by which to determine Form8’s obligations, whereas the judge’s interpretation produces uncertainty.
(c)If the meaning of ‘engage’ remains ambiguous after consideration of context and purpose, the form of the parties’ sole past engagement through a formal written subcontract, as part of the surrounding circumstances, supports Southstar’s interpretation.
[54]Mann v Paterson Constructions Pty Ltd (2019) 267 CLR 560, 579–81 [19]–[24] (Kiefel CJ, Bell and Keane JJ), 592–3 [62]–[64] (Gageler J); [2019] HCA 32.
Southstar notes that it is not in dispute that there was no concluded subcontract between the parties in respect of the Walpole Street Project. Southstar accepts that one possible consequence of its construction is that it could have informally engaged Form8 on a building project in circumstances which give rise to a liability to pay Form8 for that work but Southstar would be unable to claim the benefit of a credit and would be obliged to pay that amount in full.
It is notable that, in its pleading, Southstar accepted that Form8 was entitled to the benefit of $5,000 worth of work which it completed in relation to building drawings on the Walpole Street Project. Southstar contends that this was deductible as a set-off but did not constitute a credit or payment pursuant to a subcontract and therefore did not fall within the operation of cl 6 of the Settlement Deed.

The applicable principles

Construction of commercial contracts

The general principles to be applied in the construction of commercial contracts were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd in the following terms:[55]
Applicable legal principles in these appeals
The rights and liabilities of parties under a provision of a contract are determined objectively,[56] by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.[57]
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean.[58] That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.[59]
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.[60]
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.[61] It may be necessary in determining the proper construction where there is a constructional choice.
…
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.[62]
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’.[63] Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[64]
[55](2015) 256 CLR 104, 116–7 [46]–[51]; [2015] HCA 37. See similarly Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544, 551 [16]–[17] (Kiefel, Bell and Gordon JJ); [2017] HCA 12.
[56]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656 [35] (French CJ, Hayne, Crennan and Kiefel JJ); [2014] HCA 7 (‘Woodside’).
[57]Codelfa (1982) 149 CLR 337, 350 (citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6 (Lord Wilberforce)), 352 (Mason J); [1982] HCA 24. See also Sir Anthony Mason, ‘Opening Address’ (2009) 25 Journal of Contract Law 1, 3.
[58]Woodside (2014) 251 CLR 640, 656 [35] (French CJ, Hayne, Crennan and Kiefel JJ); [2014] HCA 7.
[59]Ibid 656–7 [35] (French CJ, Hayne, Crennan and Kiefel JJ).
[60]Codelfa (1982) 149 CLR 337, 352 (Mason J); [1982] HCA 24. See also Sir Anthony Mason, ‘Opening Address’ (2009) 25 Journal of Contract Law 1, 3.
[61]Woodside (2014) 251 CLR 640, 657 [35] (French CJ, Hayne, Crennan and Kiefel JJ); [2014] HCA 7, citing Codelfa (1982) 149 CLR 337, 350 (Mason J); [1982] HCA 24, in turn citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6 (Lord Wilberforce).
[62]Codelfa (1982) 149 CLR 337, 352 (Mason J); [1982] HCA 24; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6 (Lord Wilberforce).
[63]Woodside (2014) 251 CLR 640, 657 [35] (French CJ, Hayne, Crennan and Kiefel JJ); [2014] HCA 7, citing Re Golden Key Ltd [2009] EWCA Civ 636, [28] (Arden LJ).
[64]Woodside (2014) 251 CLR 640, 657 [35] (French CJ, Hayne, Crennan and Kiefel JJ); [2014] HCA 7, citing Zhu v Treasurer (NSW) (2004) 218 CLR 530, 559 [82]; [2004] HCA 56.
In addition, the Court must have regard to all of the words used in the agreement ‘so as to render them all harmonious one with another’[65] and to ensure the ‘congruent operation [of] the various components of the whole’.[66]

Implied terms

[65]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109 (Gibbs J); [1973] HCA 36.

[66]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 529 [16] (Gleeson CJ, McHugh, Gummow and Kirby JJ); [2005] HCA 17.

In BP Refinery, the majority of the Privy Council stated that, for a term to be implied in a specific contract, the following conditions must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; and (5) it must not contradict any express term of the contract.[67] Those conditions are applied cumulatively in determining whether an implied term can be identified.
[67](1977) 180 CLR 266, 283 (Lord Simon of Glaisdale, Viscount Dilhorne and Lord Keith of Kinkel).
It follows from the circumstances in which an implied term may be recognised that it is first necessary to identify and construe the express terms of the contract. For example, one could not say that an implied term is necessary without an understanding of what the contract already provides. Equally, an assessment of the consistency between a putative implied term and the terms of the contract presupposes that the terms will have been identified and construed.[68]
[68]Servcorp (2016) 50 WAR 226, 244 [89] (Buss JA, Martin CJ and Murphy JA agreeing); [2016] WASCA 79.

The process of identifying an implied term is not the occasion for a court to improve on the contract, nor to insert a clause that a reasonable observer would consider reasonable, fair or prudent. To satisfy the business efficacy requirement, the clause must be necessary and the contract commercially ineffective without it.[69]
[69]Codelfa (1982) 149 CLR 337, 346 (Mason J); [1982] HCA 24.
In Codelfa, Mason J observed:
This is not a case in which an obvious provision was overlooked by the parties and omitted from the contract. Rather it was a case in which the parties made a common assumption which masked the need to explore what provision should be made to cover the event which occurred. In ordinary circumstances negotiation about that matter might have yielded any one of a number of alternative provisions, each being regarded as a reasonable solution.[70]
[70](1982) 149 CLR 337, 355–6; [1982] HCA 24.
In looking at the question of obviousness, the authorities refer to the stance of an officious bystander.[71] The use of the word ‘officious’ rather than the more common modifier ‘reasonable’ emphasises that the touchtone is not what the contracting parties might reasonably have included.
[71]BP Refinery (1977) 180 CLR 266, 283–5 (Lord Simon of Glaisdale, Viscount Dilhorne and Lord Keith of Kinkel), citing Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227 (McKinnon LJ); cf Codelfa (1982) 149 CLR 337, 373–5 (Aickin J); [1982] HCA 24.

Construction of the Settlement Deed

The obligations in cls 6 and 7 hinge on whether or not Southstar engages Form8 as a subcontractor on future projects. In the event that there is no such engagement within six months of the parties signing the Settlement Deed, the consequence is plain: Form8 must pay 10 monthly instalments commencing eight months from the date that Form8 accepted the offer. In that scenario, there is no question of Form8 crediting any amount, rather it is simply a case of making the scheduled payments. In the event that Form8 fails to make one or more of the payments on time, the default clause would render the whole amount (less any amount paid) immediately due and payable.
Importantly, the obligation to pay 10 monthly instalments only arises if there is no engagement. Once there is an engagement within six months of the making of the Settlement Deed, an obligation to pay monthly instalments under cl 7 cannot arise.
We turn then to consider how the Settlement Deed operates if Southstar chooses to engage Form8 on a future project. The predicate for this part of the deed is that there will be at least one engagement on a future project. In that circumstance, Form8 is obliged to ‘pay [Southstar] $345,000.00 exl. GST (‘Settlement Sum’) by way of credit’. The mechanism provided for this is that Southstar would ‘apply’ the credit against the relevant ‘subcontract sum’.
It seems fairly obvious that what was contemplated, should Southstar choose to avail itself of the opportunity by engaging Form8, was that Form8 would be engaged to provide labour or materials in respect of a building project. Southstar would then be liable to pay Form8 for the labour or materials it provided but could discharge that liability by applying the ‘credit’ that Form8 had provided.
Clauses 6 and 7 give rise to some questions of interpretation. One obvious question is the extent to which Form8 could choose the project against which the credit was to be applied and the extent to which it could insist on a subcontract being paid for partly in credit and partly in cash. The issue can be illustrated by way of the negotiations that occurred before the Settlement Deed was concluded.
On 16 January 2020, there was an exchange of correspondence between Mr Filippelli and Mr Feeney. At 3:53 pm that day, Mr Feeney emailed to say that he agreed to the credit of $345,000 if Form8 ‘do it over a couple [of] jobs’. He said it might be too hard to manage cash flow if the whole credit were applied to a single job. It is clear from that email that there was some discussion about which of the parties could choose the job against which the credit would be applied.
It follows from the text of cl 6 and the first part of cl 7 that Form8 had at least some capacity to determine which project the credit was applied against, provided that it credited the whole of the Settlement Sum by no later than 12 months from the date of the Settlement Deed. The applicants were reluctant to accept that construction but it reflects the express language, which contemplates some active step by Form8 of crediting an amount in a context where there may be more than one project against which the money might be applied. It is true that the active step once an amount has been credited is for Southstar to apply that amount against a subcontract sum, but that is consistent with some opportunity for Form8 to manage the crediting process.
Another question of interpretation is whether an amount could be credited by Form8 before the completion of the work under the relevant subcontract. As noted, the judge considered that an amount could only be credited and applied in respect of completed work.[72] It was this conclusion that led the judge to hold that no amount had been credited in respect of the Walpole Street Project. In our opinion, there is no textual reason why that should be so. The subcontract sum under a subcontract may, depending on its terms, be known or capable of estimation at the time the subcontract is made. In such a situation, credit could be given against the subcontract sum in advance of the performance of work. Form8 would be obliged to provide the services or labour under the subcontract in accordance with the terms of that subcontract and any entitlement to be paid would be discharged by Southstar applying an amount referable to the Settlement Sum. The same would hold true for an engagement short of a contract, as discussed further below.
[72]Reasons, [28].
The third, and critical, question of interpretation, is what happens where Southstar does not engage Form8 on a subcontract or subcontracts that have a total subcontract sum at least equal to the Settlement Sum.
Southstar submits that, if there is an inadequate contract sum against which the full amount of the Settlement Sum can be applied, the default clause comes into play. It says that, in that situation, Form8 will have ‘defaulted in crediting’ the Settlement Sum and the entire amount of the Settlement Sum less any amounts already paid or credited will become immediately due and owing. It finds some support in the language of cl 7, which requires that Form8 ‘must credit [Southstar] the Settlement Sum by no later than 12 months’ after accepting the settlement offer.
That language is not conclusive, however, given that there was no opportunity for Form8 to credit any amount to Southstar unless and until Southstar had engaged Form8 on a subcontract. Ultimately, Southstar’s submission depends on a broad meaning of the phrase ‘default in crediting’ in cl 8 of the Settlement Deed and its interaction with cls 6 and 7. Southstar submits that ‘default’ means a failure to credit the Settlement Sum, regardless of the reason, and including where Form8 is not at fault in any way. It makes that submission having regard to what it says is the commercial purpose of the agreement, its text and the availability of the release.
In our opinion, the word ‘default’ in cl 8 is designed to capture a breach by Form8 of an obligation imposed on it under the Settlement Deed. And the phrase ‘default in crediting’ presupposes a failure by Form8 to do something that it would otherwise be able to do or perform.
As Southstar’s arguments acknowledged, it is necessary to identify a relevant obligation and its scope before turning to the default clause. Southstar submits that Form8 was in default of the first part of cl 7, which it said imposed an absolute and unqualified obligation. That is, it treats the opening words in cl 7 as importing a freestanding obligation to pay the Settlement Sum in full by the first anniversary of the Settlement Deed.
We do not regard the first sentence of cl 7, which provides that ‘[Form8] must credit [Southstar] the Settlement Sum by no later than 12 months from the date [Form8] accept[s] this offer’, as an independent obligation. Rather, it is a timing clause which operates on the principal obligation found in cl 6 to pay by way of credit. The first part of cl 7 ensures that the ability of Form8 to credit an amount against the subcontract does not extend indefinitely but does not change the nature of the obligation.
Clause 6 of the Settlement Deed contemplates that there may be two future projects (although this number could be increased by agreement) in respect of which Form8 could pay by way of credit. Although, as we have already observed, there was some capacity for Form8 to choose the subcontract against which the amounts might be credited and the timing at which that might occur, the first sentence of cl 7 required Form8 to provide full credit within 12 months. And the obligation to pay ‘by way of credit’ does not contemplate a cash payment.
The potential adverse impact of the timing constraint imposed by the first part of cl 7 is ameliorated to some extent by our preferred construction that allows a credit to be advanced before the relevant work is completed. It enables Southstar to engage Form8 on a project that might extend beyond 12 months but still require Form8 to credit the full amount against such a project before the completion of 12 months. In that situation, Form8 would be obliged to work off the credit past the first anniversary of the deed.
As already adverted to, the obligation imposed on Form8 by cls 6 and 7 depends fundamentally on whether or not it is engaged on a future project: if there is no engagement within the time window, then there is an obligation on Form8 to pay the Settlement Sum in instalments. On the other hand, if there is ‘any’ subcontract concluded between the parties, the obligation on Form8 is to pay by way of credit. Whether or not there is an engagement which would enable this to occur depends on Southstar. If the only engagement is for a subcontract sum that is less than the Settlement Sum, there would be no means by which Form8 could credit the Settlement Sum in full. Such a circumstance is, to that extent, outside the control of Form8 and responsibility for it would lie with Southstar. In these circumstances, we do not accept that Form8 would ‘default in crediting … the Settlement Sum’. It has not failed to perform an obligation that was capable of being performed by it. To hold to the contrary would give inadequate weight to the use of the word ‘default’ and would not sit well with the structure of cls 6 and 7 which provide for two alternatives: payment by instalment or by credit.
In our opinion, in this context and as it usually does, the word ‘default’ carries with it the notion of a breach of the obligation due to some fault or dereliction by the relevant party. The word ‘default’ generally means a failure or neglect to act and, in a legal context, usually means a failure to perform that which is legally required.[73] It is true that the circumstances in which Form8 might ‘default in crediting’ may be limited given it had at most limited opportunity to refuse to credit against a project. They would extend to the situation in which Form8 insisted on payment in cash for work done rather than accepting the application of credit against a subcontract sum. That relatively narrow operation does not justify giving a broad meaning to the word ‘default’ which denies its normative content.
[73]Argyle Lending Pty Ltd v Lantouris [2022] VSCA 60, [127] (Niall, Walker and Macaulay JJA), citing Macquarie Dictionary (online at 16 March 2022) ‘default’; Albert v Grosvenor Investment Co Ltd (1867) LR 3 QB 123.
If it were intended that, at the conclusion of 12 months, any outstanding balance would be payable, it is very improbable that this contingency would have been addressed by way of default rather than by an express term providing for the payment of any outstanding balance. That is particularly so where there was a mechanism to deal with the situation in which there was no subcontract. Indeed, it was this supposed gap that informed the judge’s identification of an implied term imposing an obligation to pay where the amount credited is inadequate to discharge the Settlement Sum.
We are reinforced in our construction of the word ‘default’ because it appears in a document which also imposes a guarantee on the part of the applicants. By cl 12, the applicants agree ‘to jointly and severally guarantying [sic] the obligations’ under the settlement terms with immediate effect. Having regard to the structure of cls 6, 7 and 8, it seems tolerably clear that that guarantee would operate in the event of a default in crediting or paying the Settlement Sum in accordance with cls 6 and 7. In that circumstance, the whole amount, less any amount already paid, would become immediately due and owing by Form8 in the first instance and, alternatively, the applicants under the guarantee. Not only should a guarantee be construed in favour of the guarantor,[74] but also the operative subject matter of the guarantee is a default on the part of Form8, which is again redolent of an established breach of obligation.
[74]Bofinger v Kingsway Group Ltd (2009) 239 CLR 269, 292 [53]; [2009] HCA 44 (Gummow, Hayne, Heydon, Kiefel and Bell JJ).
Southstar’s construction also produces an anomaly. In the event that Southstar does not engage Form8 on any subcontract, the amount would be due in monthly instalments commencing 8 months from the acceptance of the Settlement Deed. On the other hand, on Southstar’s construction, if there were a small contract that did not discharge the Settlement Sum, the whole amount would be due 12 months from the date of the deed. By engaging Form8 on a small subcontract, Southstar could accelerate the repayment and make it payable as a lump sum on the basis that there was a ‘default’ that was largely outside the control of Form8.
Southstar places heavy reliance on what it says is the commercial purpose of the Settlement Deed. It says that there would be no commercial value in allowing Form8 to avoid paying the Settlement Sum and no utility in denying a full release to the parties when the terms of the deed have been complied with. We do not regard that argument as persuasive. First, the payment of the Settlement Sum is only part of the agreement. There are other rights and obligations incurred in relation to the incomplete and defective works in relation to the Johnston Street Project. It is difficult, reading the agreement as a whole, to discern the extent to which the Settlement Sum was critical to the resolution of the dispute. It was plainly an important part of the agreement but it was not the only benefit that was to be derived.
Further, the commercial position of Southstar was protected by its ability to choose whether or not to engage Form8 under a subcontract. If Southstar was concerned about there being an inadequate subcontract sum to absorb the whole of the Settlement Sum, it was under no obligation to subcontract at all. Further, in the context of dealing with a subcontractor where issues of solvency may have arisen, it was not commercially unwise to seek to obtain credit or services rather than the payment of cash.
The existence of the release in cl 9 is a matter that has to be taken into account in the construction of the Settlement Deed as a whole. It is plain on its text that the release of Form8 will not take effect ‘until the Settlement Sum is paid/credited to [Southstar] in full’. Southstar relies on the release in support of its construction that, come what may, Form8 would be required to pay the Settlement Sum in full. In our view, the possible disconnect between performance of the obligations and obtaining the release cannot overcome what we consider to be the clear text of the operative provisions.
On the correct construction of the Settlement Deed, there were two circumstances in which Form8 would be liable to make a payment in cash. The first is under cl 7, where there was no engagement within the six-month period. The second is under cl 8, where Form8 was in default in either crediting or paying the Settlement Sum. As events transpired, neither circumstance arose.
It follows that we are unable to uphold Ground 2 of the notice of contention.

The implied term

The principles that a court must apply in order to identify an implied term in a contract are set out above. With respect to the judge, there was no basis to identify the implied term.
The first reason is that the implied term was not necessary in order to make the Settlement Deed workable. In this context, necessity is not to be judged by reference to what might be reasonable or fair and just. On the plain terms of the Settlement Deed, there were, in the first instance, two pathways for the payment of the Settlement Sum: by way of credit against subcontract sums or, alternatively, payment in monthly instalments. The only other circumstance in which a payment was liable to be made was in the event of default by Form8.
The contract was not unworkable. The potential for a shortfall between the amount credited and the Settlement Sum is obvious from the terms of the agreement. The shortfall may have come about either as a result of the default in crediting or because there were insufficient subcontracts against which the amount could be applied. The Settlement Deed dealt expressly with the former in the default clause.
The judge considered that the Settlement Deed would not be workable if Southstar ‘could not obtain the full benefit of the credit and Form8 could not obtain a release’.[75] It is important not to assess the mutual benefit of the Settlement Deed by reference to individual terms without regard to the agreement as a whole. As the applicants observe, there were considerable benefits and obligations concerning the works at the Johnston Street Project, including those relating to what were alleged to be incomplete or defective works. For example, Southstar was freed from any claim that Form8 might otherwise have had to the balance owing under the Johnston Street contract, which the deed records as being $176,008.79 (excluding GST).
[75]Reasons, [86].
Further, Southstar had a discretion not to engage Form8 on any future project and, in those circumstances, had an entitlement to be paid in instalments and the benefit of the default clause. On the proper construction of the Settlement Deed, engagement of a subcontractor carried a risk if the subcontract sum was less than the Settlement Sum. The existence of that risk did not make the contract unworkable. It may have made that option less desirable, although the ability to obtain work rather than cash may have been advantageous in the event there was any solvency risk attaching to Form8.
The second reason is that the implied term is not so obvious that it goes without saying. Even if it is accepted that the criterion of ‘obviousness’ should be viewed in light of the unsophisticated nature of the deed,[76] the problem that the implied term was designed to address had no single or obvious answer. The implied term found by the judge produced a third pathway that provided for a part-payment, part-credit arrangement incorporating monthly instalments. Undoubtedly, that was one way to deal with the situation that eventuated. However, it was by no means the only one. An alternative might have been to provide for the whole of the Settlement Sum outstanding to become due and payable at a specific time. Further, in the present case, the circumstance came about due to the fact that Southstar was placed in administration and there was no further engagement of Form8. It did not go without saying that the parties would have addressed this risk, which was entirely outside the control of Form8, in the manner identified in the implied term.
[76]Realestate.com.au Pty Ltd v Hardingham (2022) 97 ALJR 40, 64 [114] (Edelman and Steward JJ); [2022] HCA 39.

The parties expressly dealt with the contingency at least to the extent of providing that the release would not operate unless and until the Settlement Sum was paid or credited in full.
The third reason is that the implied term is not consistent with the express terms, in particular the requirement in cl 6 that the Settlement Sum be paid by credit and the alternative requirement in cl 7 that it be paid, in defined circumstances, by monthly instalments. The insertion of a third composite option is not consistent with the bargain that was struck.

Was Form8 ‘engaged’?

The judge was correct in his construction of the phrase ‘engage you as a subcontractor’ in cl 6 of the Settlement Deed. The word ‘engage’, in its ordinary meaning, is capable of extending to an informal arrangement by which one person is appointed by another to undertake a given task. Similarly, the ordinary meaning of the word ‘subcontractor’ is capable of extending to a person who performs part of a job for which another person is responsible.
There is nothing in the context or purpose of cl 6 to suggest that the word ‘engage’ should be given a narrower meaning. Contrary to Southstar’s submission, the assessment of the time at which Form8 has been ‘engaged’ is not so uncertain as to prevent identification of whether the engagement has occurred within the prescribed 6‑month period. Further, we do not accept that giving the word ‘engage’ the technical meaning for which Southstar contends would prevent further disputation and thereby promote the purpose of the Settlement Deed. On the contrary, it is not clear on what sensible basis, referrable to the purpose of the Settlement Deed, cl 6 should be construed so as to deny Southstar the right to apply the Settlement Sum against the value of work performed by Form8 on a project merely on the basis that no formal contract has been entered into. That construction would work commercial inconvenience for no evident purpose, and runs contrary to the commercial reality of the industry in which Form8 and Southstar operate, in which not all work will be performed according to a formal contract.
Given this, it follows that the ‘subcontract sum’ referred to in cl 6 of the Settlement Deed refers to the amount owing under an engagement of Form8 as a subcontractor, whether or not a formal contract has been entered into.
On the facts, the judge found that, from 17 January 2020, Southstar was keen to involve Form8 in the Walpole Street Project if possible.[77] That finding was supported by the correspondence exchanged during that time. The two entities began negotiations from about that time in relation to Form8 providing concrete form work and services on the project. By late February 2020, Form8, to the knowledge of Southstar, had obtained a quote for design and documentation and, by 3 March 2020, they had agreed upon the cost of the scope of the works of the project and the credit to be applied from the Settlement Sum. Specifically, on 3 March 2020, the parties agreed that the contract price for the Walpole Street Project was to be $893,769, including a credit of $120,024 to be deducted from the Settlement Sum.[78] There were further discussions in which Southstar told Form8 to proceed on the architectural drawings, and Form8 had ordered steel products.[79]
[77]Reasons, [122].
[78]Ibid [111].
[79]Ibid [122].
On those facts, and on the correct interpretation of cl 6, Form8 was engaged as a subcontractor even though no formal contract had been entered into. In that respect, cl 6 is at least capable of applying to the situation in which work has been done in expectation of a credit being applied, and it is not necessary for present purposes to identify what sort of arrangements short of that would be sufficient to constitute an engagement for the purpose of cl 6.
Ground 1 of the notice of contention must be rejected.

Conclusion

The application for leave to appeal should be granted, the appeal allowed and the orders made by the County Court should be set aside. In their place, there should be judgment for the defendants.
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[2024] VSCA 153

28 June 2024